Foreign Outfits Rue Sarbanes-Oxley

December 14, 2004

By Beth Carney The tough corporate-reporting regulations passed by Congress in 2002 after the wave of post-boom financial scandals have many American companies scrambling to comply with the new requirements. But in Europe, they're provoking a slightly different reaction.

As of the end of 2003, 305 European outfits with equity or debt traded in the U.S. were required to report to the Securities & Exchange Commission. Yet a few with dual listings on European and U.S. stock exchanges are reevaluating whether it makes sense to be listed in the U.S. at all. Some companies that are undergoing cost-cutting programs, such as British online-travel group Lastminute and German software company Lion Bioscience (LEON), already have initiated the process to withdraw from U.S. stock exchanges.

COSTLY BURDEN. While the deadline for European companies to file more detailed reports is months away, complaints about the Sarbanes-Oxley regulations are increasing. Last week a delegation of European executives from companies like Cadbury Schweppes (CSG), Siemens (SI), and BASF (BF), met with in Washington with SEC Chairman William Donaldson to lobby for rule changes that would ease the burden. According to the Confederation of British Industry (CBI), the trade group that organized the Anglo-German delegation, the main complaint was the increased cost of complying with Sarbanes-Oxley Act's new regulations.

"Sarbanes-Oxley has focused the minds of our members," says Susannah Haan, the CBI's senior legal adviser. "Although most of our members that have securities listed in the U.S. market are reasonably happy, some haven't realized the benefits they expected, and they're questioning now whether they need to list on the U.S. market."

Financial-management consultancy Parson Consulting estimates that complying with Sarbanes-Oxley would cost the 70 British-headquartered businesses included in their survey a total of $860 million. Another survey of corporate board members conducted by executive-search firm Korn/Ferry International estimates that complying would cost the U.S. companies surveyed an average of $5.1 million.

TOUGH TO QUIT. Meanwhile, as the cost of regulation grows, some say the advantages of listing on a U.S. exchange are decreasing as U.S.-based institutional investors become more willing to buy shares on European markets. For online-travel group Lastminute, which had fewer than 5% of its shares in the form of Nasdaq-traded American depository receipts (ADRs), the numbers simply didn't add up. It announced plans to delist in July and expects to be free of SEC reporting obligations by February, 2005.

"When Sarbanes Oxley was enacted, we felt that it was going to be a cost that was so significant for us that the benefits of having an additional listing in the States were more than outweighed," says Simon Watkins, Lastminute's company secretary, who adds that forsaking the U.S. listing won't deter most institutional investors. "We still like to attract U.S. investors, but we feel that most of those are now willing to invest in London."

It's unlikely that the U.S. stock markets will see a mass exodus of international companies in the near future, and not only because many continue to want access to the world's largest pool of market capital. Currently, even if outfits leave an exchange, they are still required to report to the SEC until they can prove that their U.S. shareholders number less than 300. For many companies, this can be close to impossible. "If it were easy, many of them would have [delisted] already," says Michael Hughes, chair of the audit process at KPMG in Britain.

"WORTH THE BENEFIT?" The difficulty of deregistering was one focus of the European executives' meeting with the SEC last week. In addition to highlighting the cost of complying with the new rules, the delegation pressed for a change to the 300-investor threshold, asking instead that companies with less than 5% trading volume in the U.S. be exempt from reporting. While not commenting directly on the meeting, the SEC is aware of foreign companies' concerns and is considering their questions seriously, says SEC spokesman John Heine.

Meanwhile auditors and others say Sarbanes-Oxley is likely to inhibit new listings. Companies without a U.S. presence will be less likely to seek listings, and those from developing markets may start looking to European stock exchanges for their dual listings.

"If you're a domestic company, you have no choice. If you're a foreign company that has a choice, I think people will say, 'Hang on a minute, we'll reflect on this and see if it's worth the benefit,'" says Tom Troubridge, head of the London capital-markets group at PricewaterhouseCoopers.

LONDON CALLING. For example, Air China, the Middle Kingdom's largest international airline, is poised to offer shares on the Hong Kong and London stock exchanges. It was able to use the same prospectus in both locations because the regulatory requirements are so similar. Although it's not known whether the similar regulatory environments were a factor in Air China's decision to list in England, the London Stock Exchange (LSE) is in discussions with a number of companies from China and Russia seeking refuge from U.S. regulation, says Tracey Pierce, the LSE's head of international business development.

"In our discussions with those companies, the impact of Sarbanes-Oxley is factoring heavily in their decision-making," she says. In any case, foreign companies will be watching closely to see how the U.S. outfits' reporting goes.

For large U.S. businesses, the requirements outlined in the law's Section 404, which requires companies and auditors to attest to the quality of internal financial controls, took effect Nov. 15. Foreign companies have until July, 2005, to comply. Whether the U.S. outfits get clean reports from the SEC when they file may determine how willing international companies are to do the same. Carney is a reporter for BusinessWeek Online in London